XYZ, Inc. manufactures an industrial air compressor. If applicable, show all of
ID: 2589268 • Letter: X
Question
XYZ, Inc. manufactures an industrial air compressor. If applicable, show all of your work/calculations to receive full credit.
Based upon a production of 5,000 units, the company data is as follows:
Cost for 5,000 units
Variable materials $100
Variable labor 150
Variable factory overhead 50
Fixed factory overhead 200
Variable marketing costs 50
Fixed marketing costs 140
a. Assuming the units sell for $800, what is the breakeven sales amount in terms of dollars and units? If applicable, show all of your work/calculations to receive full credit.
b. If unit sales could be increased to 5,500 by lowering the price to $750, would the company be better off than it is now (at 5,000 units)? Explain. If applicable, show all of your work/calculations to receive full credit.
Explanation / Answer
a.
Contribution margin per unit = Selling price - Variable materials - Variable labour - Variable factory overhead - Variable marketing costs
Contribution margin per unit = 800 - 100 - 150 - 50 -50 = 450
Contribution margin percentage = Contribution margin per unit / Selling price per unit
= 450 / 800
= 56.25 %
Fixed costs = (Fixed factory overhead + Fixed marketing costs) * 5,000 units
= (200 + 140) * 5,000 units
= 1,700,000
Break even point in dollars = Fixed costs / Contribution margin percentage
= 1,700,000 / 56.25%
= 3,022,222
Break even point in units = Fixed costs / Contribution margin per unit
= 1,700,000 / 450
= 3,778
b.
Contribution margin per unit = Selling price - Variable materials - Variable labour - Variable factory overhead - Variable marketing costs
Contribution margin per unit = 750 - 100 - 150 - 50 -50 = 400
Contribution margin percentage = Contribution margin per unit / Selling price per unit
= 400 / 750
= 53.33 %
Fixed costs = (Fixed factory overhead + Fixed marketing costs) * 5,000 units
= (200 + 140) * 5,000 units
= 1,700,000
Break even point in dollars = Fixed costs / Contribution margin percentage
= 1,700,000 / 53.33%
= 3,187,699.
Break even point in units = Fixed costs / Contribution margin per unit
= 1,700,000 / 400
= 4,250
Increase in Break even revenues = 3,187,699 - 3,022,222 = 165,477
Increase in Break even units = 4,250 - 3,778 = 472.
The company has to sell more than now to break even.
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